Search This Blog

Wednesday, June 22, 2011

Market Thought... trader's wet-dream?

Papandreou got the confidence vote, now the vote is on to the austerity plan. The EU is allowing Greece to choose its fate. By July the world will know one of two things.

1. Greece adopts the new austerity, and gets the bailout funds.

The removal of a systemic risk allows for a realization that the market is extremely undervalued with the new found sense of (relative) stability. A sizable rally ensues because the big-boys will model SP500 based on earnings and reasonable PE metrics. (With an SP500 2011 eps of $96, and a PE between 14-15 (below average), the SP500 range should be 1344-1440.)

or

2. Greece rejects the austerity

By rejecting the austerity it goes into default causing a banking crisis. The systemic risk becomes real. Everyone and their mother knows it, and has been talking about it for a year. The market has even been anticipating some level of systemic risk. So the question becomes, why wouldn't the EU know it or anticipate it either? The EU powers-that-be had a year to prepare for it, and has a very sizable monetary facility they can use to infuse the banks with capital to potentially back-stop the contagion. (This is pure assumption, but if a plan was not devised, well then they are morons, and I just don't think they are morons.)

This will lead to a ton of increased uncertainty, and even provides a way for the EU to remove Greece from the Euro. The markets will continue their slide, but depending on the potential back-stop, the actual systemic risk could be mitigated (if planned properly). If decisive action is taken to mitigate the bank concern, then the SP500 should only test around the 320 SMA.

Despite the if/then scenario that exists over the next two weeks or so, I think there is clarity as to what should happen. And clarity-of-action is the wet-dream of all traders. (Or is it just mine? :)

Do not know yet. All depends on market action. The market will be knee deep in earnings come late July/early August, and I think we rally cause of the combo of discounted market and relatively strong earnings. If the market is overbought, and too extended, I can see a short-term sell the news. But it is too soon to tell.